China Buys U.S. Businesses at Record Pace; What are the Implications? Will Alarm Bells Ring?

CNN Money reports Chinese buying of U.S. business at record pace

Chinese direct investment in the United States could hit a record high in 2012, according to a new research report released Wednesday.

Total Chinese foreign direct investment in the U.S. is on pace to reach at least $8 billion this year, according to the report from research firm Rhodium Group.

That would top the previous record of $5.7 billion reached in 2010, said Thilo Hanemann, research director with Rhodium Group, which tracks all acquisitions and investments in manufacturing facilities, warehouses, labs and offices by foreign companies in the United States valued at $1 million or higher.

In manufacturing, the biggest investments are being made by Chinese firms with products that have been slapped with hefty anti-dumping tariffs, Hanemann said.

Opening up a plant in the United States allows Chinese firms such as Golden Dragon Precise Copper Tube Group, Inc. -- which broke ground this year on a $100 million plant in Thomasville, Ala. -- to avoid these tariffs.

What are the Implications?

China buying US businesses is a necessary part of correcting global imbalances.

As a direct function of trade math, China's reserves must eventually return to the US. The only way that will not happen is if the US defaults on foreign-held treasuries.

However, don't be deceived by the words "record pace".

To put the $8 billion of direct investment in perspective, China has close to $1.75 trillion in US dollar reserves and $3.2 trillion worth of total reserves.

Will Alarm Bells Ring?

Some might be alarmed by China buying US businesses.

Actually this is a good thing, and the faster things speed up, the better off the US and China will both be. Direct investment will provide much-needed jobs in the US and it will alleviate China's dependence on an unsustainable model of fixed investment.

Unfortunately, "record pace" is nowhere close enough to matter, but all trends start somewhere. The key point is that mathematically, dollars must return home, and the sooner it happens the better off the global economy will be.

Don't expect alarmists in Congress and union sympathizers to see it that way.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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US Factory Orders "Unexpectedly" Decline; US Car Sales "Unexpectedly" Decline; Expect the Unexpected

The words for the day once again are "unexpectedly declined". I have a couple of examples.

The New York Times reports U.S. Factory Orders Fall Unexpectedly

New orders for factory goods unexpectedly fell in the United States in June, a fresh sign that the slowdown in the country’s manufacturing sector will probably stretch into the second half of the year.

The Commerce Department said on Thursday that new orders for manufactured goods dropped 0.5 percent during the month. Economists in a Reuters poll had forecast a rise of 0.5 percent.

American factories appear to be one of the sectors most vulnerable to Europe’s festering debt crisis. The trend in American manufacturing has appeared softer and has added to concerns the economic recovery is losing steam. The decline in new orders in June will probably mean softer output down the road, which could weigh on economic growth.

Car Sales "Somewhat Softer Than Expected"

Yesterday, Yahoo!Finance reported U.S. auto sales remain soft in July

Major automakers reported U.S. auto sales for July that were somewhat softer than expected as high U.S. unemployment and weak consumer confidence kept would-be buyers on the sidelines.

July auto sales showed the continuation of what has been a slowdown in growth since the late spring. Sales early this year shot past even the most bullish forecasts, but starting in May, the rate of improvement started to weaken.

"If we were talking in February this year and you asked me what we're going to have July, I'd say at least 14 and a half," said TrueCar.com analyst Jesse Toprak. "But we're going to barely get to 14."

GM, the largest U.S. automaker, reported on Wednesday a 6 percent drop in July U.S. sales, while Ford posted a 4 percent drop. The smallest U.S. automaker, Chrysler Group LLC, posted a 13 percent increase.

GM and Ford both pinned their declines on lower sales to fleet customers like rental car companies. GM's fleet sales fell 41 percent, in line with the company's forecast last month.

But their overall results were still lower than some estimates. Analysts had expected better financing deals, pent-up demand and increased construction spending to offset the sluggish U.S. economy.

Toyota sales were up 26 percent to 164,898 in July. A year ago, Toyota was still grappling with major vehicle shortages stemming from the March earthquake in Japan. In a release, Toyota said customers were taking advantage of long-term, low-interest financing at low lease rates.

Expect the Unexpected

Why economists could not see this coming is a mystery. Manufacturing new orders have collapsed virtually everywhere, including the US. GDP, a lagging indicator, is 1.5% annualized, well below the stall speed of 2%.

Based on new orders and anecdotal evidence from the world's largest auto parts manufacturer, I confidently predicted on July 9, Global Collapse In Auto Sales Coming Up.

On July 2, I noted US Manufacturing ISM Contracts for First Time in Three Years; New Orders and Prices Plunge; Perfect Miss: 0 of 70 Economists Polled By Bloomberg Expected Contraction

Yesterday I noted Dismal Manufacturing Numbers Worldwide; US ISM in Contraction Second Month.

Yet economists were surprised by today's "unexpected decline" in US Factory Orders and yesterday's decline in auto sales.

The surprise ought to have been that car sales and factory orders held up as well as they did.

Growing Evidence of Recession

With each economic report, it becomes more clear the US is already in recession, yet economists cannot see that yet either.

If the jobs report is miserable tomorrow, and I expect it to be, then expect economists to be surprised by that too. For Friday's job forecast ADP predicts +163,000 jobs but I'll Take the Under (Way Under).

The economic consensus for Friday is about +100,000 jobs and I will take the under on that as well. Zero to 50,000 would not surprise me in the least.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Draghi Hints at Bond Buying But Rules Out Banking License and Warns Governments Must Use EFSF/ESM, ECB Cannot Replace Governments; 10-Year Yield Back Over 7%

Today the ECB left interest rates unchanged and hinted at future bond purchases but also warned "Governments must stand ready to activate the EFSF/ESM".

The Financial Times has details in Draghi prepares for fresh bond buying

Draghi admitted to Bundesbank reservations about bond-buying and made clear that governments would first have to apply to the eurozone’s rescue funds – the European Financial Stability Facility and the European Stability Mechanism – and accept “strict and effective conditionality”.

“First of all governments need to go to the EFSF; the ECB cannot replace governments.”

Mr Draghi also said the ECB “may consider” further non-standard measures but declined to elaborate.

Mr Dragi indicated there would be no immediate intervention. “In the coming weeks we will design the appropriate modalities for such policy measures,” he said.”

He said that all members of the ECB’s governing council had endorsed the framework of measures “with one exception."

“It's clear and it's known that Mr Weidmann and the Bundesbank have their reservations about the programme of buying bonds,” he added.

He also ruled out giving the eurozone’s rescue funds a banking licence, a move that could vastly increase their firepower but which is firmly opposed by the Germany and other core eurozone members. “The current design of the ESM does not allow it to be recognised as a suitable counterparty.

Text of Draghi's Press Conference

I cannot find some of the direct quotes the Financial Times mentions, but the gist of the Financial Times' translation seems accurate.

Here are some snips from ECB President Draghi Statement to Press Conference

Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged, following the decrease of 25 basis points in July. As we said a month ago, inflation should decline further in the course of 2012 and be below 2% again in 2013.

Exceptionally high risk premia are observed in government bond prices in several countries and financial fragmentation hinders the effective working of monetary policy. Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible.

In order to create the fundamental conditions for such risk premia to disappear, policy-makers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination. As implementation takes time and financial markets often only adjust once success becomes clearly visible, governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist – with strict and effective conditionality in line with the established guidelines.

The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions. The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed. Furthermore, the Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission. Over the coming weeks, we will design the appropriate modalities for such policy measures.

Yields Soar

Draghi's statements sent the Spain 10-year bond yield soaring back above 7%, currently 7.13, up 40 basis points.

Yield on Italy's 10-year government bond is up 30 basis points to 6.23%.

Clearly the market was expecting far more after Draghi's statements last week that the ECB would do "whatever it takes".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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San Bernardino Files Chapter 9 Bankruptcy Petition; Pension and Medical Liabilities Impossible to Meet; Major Wave of Municipal Bankruptcies Has Begun

Fearing action by creditors, San Bernardino, California, Files Chapter 9 Bankruptcy Petition

San Bernardino, California, after disclosing a $46 million shortfall in the city’s budget, filed for municipal bankruptcy.

San Bernardino listed assets and debt of more than $1 billion in a filing yesterday with the U.S. Bankruptcy Court in Riverside, California. It’s the third California city to seek court protection from creditors since June 28.

City officials sped up the timing of the filing because they were concerned that some creditors may take legal action against the city, Mayor Patrick J. Morris said yesterday in a phone interview. Under Chapter 9, all court cases and other legal actions against the city will be halted until the bankruptcy case is over.

One of the main problems is the high cost of the city’s union contracts, particularly for police and fire service, City Councilman Fred Shorett said in a phone interview.

Under the city charter, which is like a constitution for municipal governments, city officials must use a specific formula for determining wages and other benefits paid to its police and fire employees, Shorett said. That formula requires the city to set compensation by comparing employee pay in San Bernardino, which has one of the highest home foreclosure rates in California, with cities in the state that are about the same size and have much more money to spend, Shorett said.

“We are set up for failure,” he said.

The city has about $55.9 million in bond debt tied to the general fund. The city also has unfunded liabilities of $296 million, including $195 million related to pensions and $61 million related to medical benefits for retired city workers.

Major Wave of Municipal Bankruptcies Has Begun

A major wave of municipal bankruptcy filings is now underway. Scores of other cities nationwide will eventually do the only thing that makes sense: file for bankruptcy to escape pension promises and union salaries that cannot possibly be met.

In California, Oakland and Los Angeles are among the walking dead.

Unions would be wise to negotiate with cities in advance of bankruptcy filings to protect the most benefits for the most workers. However, the odds of that happening are close to zero.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Problems in Spain: Revenues Collapse, State Spends Nearly Twice as Much as Revenues Collected in First Half

It's hard to meet budget targets as promised to the bureaucrats in Brussels when revenues collapse and the State Spends Nearly Twice as Much as Revenues Collected in First Half.

Via Google translate (heavily modified by me) from El Confidencial:

The Spanish economy continues its adjustment process. But the results in terms of deficit reduction, remain meager. Very meager. To the extent that in the first half of the year-on-national accounts, government spending-which really is committed to spend but have not been paid, have grown by 17.6% over the same period of 2011 .

Or what is the same, the central government already has obligations amounting to 87.967 billion. The resources, however, only amounted to 44.879 billion (-4.1%), which means that during the first six months of the year the state has spent (or is obliged to spend) almost double what it has collected in revenues.

Debt service has become the second biggest problem in the budget (after unemployment benefits). In fact, interest payments of 12.239 billion euros, is already 23% more than the government pays public employees (9.953 billion euros). This does not mean, however, that the debt service is causing the budget shortfall. In fact, the primary deficit (excluding interest payments) amounted to 30.839 billion in just six months.

Rising unemployment has forced the state to make some additional contribution of 4,404 billion euros to the Public Employment Service (SPEE), while Social Security has received an additional 2.575 billion euros.

The central administration also had to make advance payments to the autonomous communities totaling 5.476 billion, and another 865 million have gone to local corporations. In total, 13.320 billion of additional costs upward bias the data deficit for the first of the year.

In any case, the underlying problem continues to be government revenue, strongly influenced by the deterioration of economic activity.

VAT receipts actually are falling at a rate of 8.6% on a comparable basis. Panelists expect the destruction of more than 300,000 jobs next year, 2% of the workforce. That is, ten times more than estimated as more likely the government.

The Spanish implosion continues and nothing can stop it.

Mike "Mish" Shedlock
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Dismal Manufacturing Numbers Worldwide; US ISM in Contraction Second Month; Why Another Round of QE is Pointless

Inquiring minds are looking into the July 2012 Manufacturing ISM Report On Business®

"The PMI registered 49.8 percent, an increase of 0.1 percentage point from June's reading of 49.7 percent, indicating contraction in the manufacturing sector for the second consecutive month, following 34 consecutive months of expansion. The New Orders Index registered 48 percent, an increase of 0.2 percentage point from June and indicating contraction in new orders for the second consecutive month, but at a slightly slower rate. Both the Production Index and the Employment Index remained in growth territory, registering 51.3 percent and 52 percent, respectively. The Prices Index for raw materials registered 39.5 percent, an increase of 2.5 percentage points from the June reading of 37 percent, indicating lower prices on average for the third consecutive month.

MANUFACTURING AT A GLANCE JULY 2012
Index	Series Index Jul	Series Index Jun	Percentage Point Change	Direction	Rate of Change	Trend* (Months)
PMI	49.8	49.7	+0.1	Contracting	Slower	2
New Orders	48.0	47.8	+0.2	Contracting	Slower	2
Production	51.3	51.0	+0.3	Growing	Faster	38
Employment	52.0	56.6	-4.6	Growing	Slower	34
Supplier Deliveries	48.7	48.9	-0.2	Faster	Faster	6
Inventories	49.0	44.0	+5.0	Contracting	Slower	4
Customers' Inventories	49.5	48.5	+1.0	Too Low	Slower	8
Prices	39.5	37.0	+2.5	Decreasing	Slower	3
Backlog of Orders	43.0	44.5	-1.5	Contracting	Faster	4
Exports	46.5	47.5	-1.0	Contracting	Faster	2
Imports	50.5	53.5	-3.0	Growing	Slower	8
OVERALL ECONOMY				Growing	Faster	38
Manufacturing Sector				Contracting	Slower	2

Dismal Manufacturing Numbers Worldwide

Reuters reports Global factories struggle as growth fears rise

U.S. and euro zone factory activity slumped again in July while Chinese manufacturing hit an eight-month low, surveys showed on Wednesday, as economies worldwide showed signs of slowing.

Economic malaise was worst in the 17-country euro zone, where output plummeted and the manufacturing sector contracted for an 11th straight month as a downturn that began in smaller countries continued to spread into core euro area economies.

The slump worsened in Italy, Spain and Greece as well as the region's two biggest economies -- Germany and France.

Europe's economic woes also depressed export orders in China and India, where manufacturing had appeared to be holding up despite the euro zone debt crisis and slowing U.S. growth.

U.S. manufacturing, meanwhile, contracted for a second consecutive month, according to the Institute for Supply Management's index of national factory activity.

A separate report from Markit showed activity barely expanding and at its slowest pace in almost three years, partly due to lower European demand for U.S. products.

"The manufacturing numbers are pretty dismal. There's really no good way to read them," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "I think they bolster the case for more Federal Reserve action, and globally the argument is pretty much the same."

Would Another Round of QE Help?

Everyone is looking for the Fed to do something.

I have to ask what good could it possibly do? Yield on the 10-year treasury is about 1.5%. Would it make any difference to businesses if it was 1.25% or even 1%?

I suggest additional monetary stimulus would not do anything to spur job creation and it would continue to punish those on fixed incomes.

An additional round of QE could ignite a further rally in equities (already in bubble land). However, one of these QE moves by the Fed will blow sky high, and with equities priced beyond perfection, the next round of QE may be the one.

I had not seen this ISM report when I wrote ADP Estimates Nonfarm Payroll Growth at +163,0000; Why I'll Take the Under (Way Under)

This is what I said earlier today "Given the global collapse in new orders including the US, weak ISM numbers in the US, and generally bad regional manufacturing reports, I believe there is potential for a really awful jobs report either this month or next and I will go for this month."

I certainly see no reason to change that call.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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ADP Estimates Nonfarm Payroll Growth at +163,0000; Why I'll Take the Under (Way Under)

ADP job estimates have been on the high side of BLS estimates for months, and I expect that to be the case again this Friday.

Please consider some snips from the July 2012 ADP National Employment Report®

Employment in the U.S. nonfarm private business sector increased by 163,000 from June to July, on a seasonally adjusted basis. The estimated gain from May to June was revised down slightly,from the initial estimate of 176,000 to 172,000.

Employment in the private, service-providing sector expanded 148,000 in July after rising a revised 151,000 in June. The private, goods-producing sector added 15,000 jobs in July. Manufacturing employment rose 6,000 this month, following a revised increase of 9,000 in June.

Employment on large payrolls—those with 500 or more workers—increased 23,000 and employment on medium payrolls—those with 50 to 499 workers—rose 67,000 in July. Employment on small payrolls—those with up to 49 workers—rose 73,000 that same period. Of the 67,000 jobs created on medium- sized payrolls, 4,000 jobs were created by the goods-producing sector and 63,000 jobs were created by the service-providing sector.

Construction employment rose for the second consecutive month, adding 5,000 jobs. The financial services sector added 9,000 jobs from June to July, marking the twelfth consecutive monthly gain.

Here are a couple of recent regional Fed manufacturing surveys to consider.

Philly Fed Manufacturing Survey


From the Philadelphia Fed Manufacturing Report ....

Indicators Suggest Continued Decreases



The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of −16.6 in June to −12.9. This marks the third consecutive negative reading for the index (see Chart). Nearly 32 percent of the firms reported declines in activity this month, exceeding the 19 percent that reported increases. Indexes for new orders and shipments remained negative but increased 12 and 8 points, respectively.

Labor market conditions at the reporting firms deteriorated this month. The current employment index decreased 10 points, to −8.4, its second negative reading in three months. The percent of firms reporting decreases in employment (18 percent) exceeded the percent reporting increases (10 percent). Firms also indicated fewer hours worked this month: The average workweek index increased 2 points but posted its fourth consecutive negative reading.

Dallas Fed Manufacturing Survey

Here are a few snips from the Dallas Fed Manufacturing Survey.

Texas factory activity continued to increase in July, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, fell from 15.5 to 12, suggesting slightly slower output growth.

Other measures of current manufacturing activity also indicated slower growth in July. The new orders index was positive for the second month in a row, although it moved down from 7.9 to 1.4. Similarly, the shipments index posted its second consecutive positive reading but edged down from 9.6 to 7.4. The capacity utilization index came in at 8.7 after rising to 13.3 last month.

Perceptions of broader economic conditions were mixed in July. The general business activity plummeted to -13.2 after climbing into positive territory in June. Nearly 30 percent of manufacturers noted a worsening in the level of business activity in July, pushing the index to its lowest reading in 10 months. The company outlook index remained positive for the third month in a row but fell from 5.5 to 1.6.

Labor market indicators reflected stronger labor demand. Employment growth continued in July, although the index edged down from 13.7 to 11.8. Twenty-one percent of firms reported hiring new workers, while 10 percent reported layoffs. The hours worked index was 4.1, up slightly from its June reading.

Price pressures were largely unchanged in July, although compensation costs rose at a faster pace. The raw materials price index held steady at 3, suggesting only slight increases in input costs this summer after strong upward pressure earlier in the year. Selling prices fell for the fifth consecutive month in July; the finished goods price index was -5.5, virtually unchanged from last month’s reading. The wages and benefits index rose nearly 10 points to 22.9, largely due to a marked rise in the share of firms noting increased compensation costs. Looking ahead, 36 percent of respondents anticipate further increases in raw materials prices over the next six months, while 25 percent expect higher finished goods prices.

Expectations regarding future business conditions were less optimistic in July. The index of future general business activity slipped from 1.3 to -7.3, registering its first negative reading in 10 months. The index of future company outlook remained positive but fell from its June level, coming in at 5.3. Indexes for future manufacturing activity also decreased, although all remained in strong positive territory.

US Services ISM and Factory Orders

On July 6th, I noted Services ISM Growth Slows - Jobs, Imports, Export Orders Contract.

Also on July 6th I noted Factory Orders Fall More Than Expected; Recovery Withers on the Vine

Given the global collapse in new orders including the US, weak ISM numbers in the US, and generally bad regional manufacturing reports, I believe there is potential for a really awful jobs report either this month or next and I will go for this month.

Addendum:

July Manufacturing ISM numbers came out today. For details, please see Dismal Manufacturing Numbers Worldwide; US ISM in Contraction Second Month; Why Another Round of QE is Pointless

Mike "Mish" Shedlock
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